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Tuesday, 4 December 2012

The Servitization of Manufacturing: Where Does Value Lie and When Is Value Realised?

One way of conceptualizing the
servitization of manufacturing is to think about the two questions: (i) where
does value lie, and (ii) when is value realised. In traditional manufacturing
environments the value lies in products & parts – the physical assets – and
value is realised at the point of sale – when the customer pays for the
product. Many manufacturing businesses, particularly those with long life cycle
products, have recognized that value can also be realized throughout the life
of product, especially when products need repair and overhaul. Such firms have
a strong focus on the aftermarket and capture significant value through the
sales of spares and repairs.

An alternative perspective is to think
about value lying in “solutions” rather than “products & parts”. This
paradigm puts the emphasis on the outcomes the customer wants, rather than the
physical product. The old Theodore Levhitt quote “customers don’t want quarter
inch drills, they want quarter inch holes” illustrates the point. Many
customers don’t want to own the physical products that many manufacturers
provide, instead they just want the end result – or the outcome – that the
product delivers. When manufacturing firms switch to an outcome focus they
often contract for capability, guaranteeing uptime and/or availability of their
equipment through life. Rolls-Royce, in its aero-engine business, now contracts
for Power by Hour, selling the thrust the engines deliver rather than the
engines themselves. A significant advantage of contracting for capability is
that the incentives of the customers and the original equipment manufacturers
are aligned. In an aftermarket focused model, it is actually in the original
equipment manufacturers interest for their equipment to break down, as they
realise value when they repair their products and provide spare parts. When
contracting for capability or outcomes, however, the original equipment
manufacturer only gets paid when their equipment is working, so it is in the
original equipment manufacturer’s interest to maximize equipment reliability,
something that customers also care about.

One of the challenges of contracting for
capability is the issue of risk. If original equipment manufacturers take
responsibility for the outcomes their products deliver, effectively
guaranteeing results for their customers, they inevitably take on significant
risk. The original equipment manufacturer is now responsible for delivering
outcomes, not just the product. Some servitizing manufacturers have decided
that the risk involved in outcome based contracting is too great and some
customers have decided they are not willing to cede control over the outcomes,
so they are unwilling to enter into contracting for capability. In such
situations there is an alternative approach to offering services - selling
knowledge and insight – recognizing that value lies in the solution the
original equipment manufacturer offers. Think here of manufacturers that also
offer design and development or installation advice. Think of those that have
moved into training and consultancy services. They no longer simply sell
products. They also sell knowledge and/or insight. Figure 1 brings these four
perspectives on servitization together into a single representation, which
illustrates the strategic choices manufacturers can consider when exploring how
to servitize. These choices are not mutually exclusive. Manufacturers can
decide both to be aftermarket and advisory focused, although clearly the
different positions require different organizational capabilities.

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About Me

Pro-Vice-Chancellor: Enterprise and Business Relations and former Head of the Institute for Manufacturing at Cambridge University. Founding Director of the Cambridge Service Alliance. Specialising in manufacturing and services, especially strategy and performance, business models and analytics.